Special Drawing Rights as a Form of Money — IMF Issues New SDRs
Most monetary observers know the Fed has a printing press and can print dollars. The European Central Bank has a printing press and can print euros. The same is true of other central banks around the world. They can each print their home currencies.
This is rarely done. It was last done in several tranches in 2009, both in response to the 2008 global financial crisis and to compensate certain members who had missed earlier allocations. Before that, the last issuance was in 1981.
But far fewer know that the International Monetary Fund (IMF) has a printing press also. It can print a kind of ‘world money’ called the special drawing right (SDR), and hand it out to the 190 countries around the world that are IMF members.
However, the IMF is now moving quickly to issue new SDRs to help reliquefy the world in the wake of the pandemic panic and recession. The IMF has recently provided the latest details on this coming issue of freshly printed SDRs.
The current consensus among the top countries in the IMF — basically the G20, which includes the G7 plus China, Brazil, India, and some other major economies — is that the new issue should be equivalent to US$500 billion. However, as much as US$650 billion could be issued without further approval from the US Congress. (The US is the largest member of the IMF and has veto power over certain major IMF actions.)
A new role for the SDR
Changes in the IMF issuance process may already be in the works. These can include special allocations to poorer countries. Right now, the allocations are in proportion to your IMF capital account, which means richer countries like the US get more than poorer countries. It is also possible for the IMF to issue SDRs to non-member entities, such as the United Nations, to be used for climate change programs.
After decades of sleeping on the sidelines, it looks like the SDR is ready to wake up and assume a role as a new major reserve currency controlled not by the US, but by the IMF executive committee, which includes China as a powerful member. This process will take time, but it has now begun in ways that are different from prior SDR allocations.
At a minimum, this expanded global money supply has some inflationary potential. Beyond that, the SDR may finally be ready to emerge as a rival to the US dollar as the reserve currency of choice for China, Russia, and the developing world.
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So what is the future of money?
Gold, Bitcoin [BTC], CBDCs, and SDRs may all play a role in the future of money.
Gold has never lost its role as a store of wealth, but it may need a digital facelift to resume its role as a convenient currency or medium of exchange. That can easily be done with existing technology, and the digital interface will be even easier in the future.
Bitcoin is not a reliable store of value and is not a widely accepted currency. It suffers from a deflationary bias, absence of a rule of law regime, and an uncertain provenance due to its permissionless blockchain that is validated by a consensus of unvetted miners. Still, bitcoin is not going away. It will continue as an object of fascination, a vehicle for speculation, and the cause of hallucination relative to real money. The end result will not be to displace money, but rather to destroy money as a linear concept. The ensuing chaos will be cured only by gold, a hot medium, which requires little engagement by the user to reimpose the reality of money.
Central bank digital currencies are already being used in China, and more are on the way from the European Central Bank and the Bank of England. The Federal Reserve may be the last to join the party, but a digital Fed dollar can be expected by 2023, if not sooner. CBDCs will not displace the currencies they represent (dollars, euros, yuan, etc), but they will increase transaction speeds, lower costs, and could disintermediate most existing commercial bank functions.
SDRs or world money will emerge not as an everyday currency, but as a kind of super-currency used exclusively by sovereign states. It may be required to settle any balance of payments, maintain books and records of global corporations, and as a numeraire for sovereign reserves. As the sole issuer of SDRs, the IMF will emerge as a world central bank. Dollars, euros, and yen will remain as local currencies, not much different than Mexican pesos today. The business of the world will be conducted in SDRs with currencies such as the dollar useful for local transactions, but not otherwise. The SDR will be digitised, not unlike CBDCs.
All that remains is a linkage between the digital SDR and gold, perhaps in response to some future financial crisis that cannot be truncated without recourse to the once dominant and future form of money — gold.
All the best,
Strategist, The Daily Reckoning Australia
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